The World Bank found that Pakistan’s power and gas circular debts increased by an average of Rs135 billion to Rs5.5 trillion (about 5.1pc of GDP) by end-January this year, despite massive repeated price shocks to consumers and a nationwide drive against theft and billing defaults. The World Bank wants the government to take further action to recover the true cost of supply.
In an effort to slow the growth of circular debt, the government has implemented extensive power sector reforms, but more work remains to be done, according to the World Bank’s most recent circular debt update. The World Bank also reported that as a result of notable rises in domestic energy costs, energy inflation rose from 40.6 percent in the first half of FY23 to 50.6 percent in 1HFY24.
However, by the end of June 2023, the circular debt in the electricity sector had grown by an average of Rs66.14 billion per month, crossing Rs2.635 trillion (2.4 percent of GDP) as of January 31 from Rs2.172 trillion.
Similarly, based on official statistics, the World Bank estimates that the circular debt in the gas industry increased by an average of Rs68 billion per month, from Rs2.391 trillion in June 2023 to Rs2.866 trillion, or 2.7 percent of GDP, by the end of January. In order to limit the growing circular debt in the gas and electricity sectors, it has urged on the government to “continue electricity and gas sector tariff reform to align tariffs with the cost of supply.”
The electricity system has seen significant inefficiencies due to structural problems, inadequate planning, and significant subsidies, which have impacted supply dependability and created enormous deficits. “Pakistan has the highest energy product subsidies in South Asia,” with two thirds of the subsidies (about 0.9 percent of GDP, or Rs976 billion) going toward electricity use.
The notified pricing is still below the cost recovery level, the bank observed, even if the gap has since shrunk. Approximately 62 percent of residential and all agricultural users are still receiving subsidies (down from 92 percent in 2021). With the recent tariff notices (July 2022 and July 2023), the progressivity of subsidies to residential users has improved; nonetheless, the subsidy to electric tube wells remains regressive, largely favoring big and rich farmers.
Revenue collection falls short of covering the cost of power delivery due to the lack of cost-reflective rates and operational and technological inefficiencies within the state-owned electricity distribution corporations (Discos). This creates a spiraling debt.
